Question

1. Why must the financial data be adjusted prior to it being made into one of the financial statements used by the firm?

2. Who assures that the firm is producing the financial statements based on GAAP and who ultimately is responsible for the accuracy of the data?

3. Why should the investors and creditors be confident that the financial statements are accurately produced?

4. Are the financial statements primarily and internal report rather than used externally of the firm?

Answer 1

1. All changes in company's accounts are not a result of physical events. Some amounts are expected to increase and decrease over day to day events. For example, salary of employees is earned every day but not paid before week end or month end. Other expenses such as rent, utilities and interest are also incurred every day. Supplies are also constantly needed. These tiny expenses and changes are not captured as they occur.

2. The FASB and GASB is responsible for ensuring that the GAAP remains the high quality benchmark for financial reporting for investors, lenders, capital providers and other users have access to the information they need to take decisions. Each business is responsible for the accuracy of the data.

3. Investors and creditors should be confident that the financial statements are accurately produced because they would like to invest in stocks or bonds that will provide highest expected rate of return and need to consider many factors for this. Financial statements provide investors and creditors with the information that help them make investments and credit decisions.

4. Financial statements is most concerned with meeting the needs of external users and not internal users. Hence, financial statements are not primarily an internal report rather than used externally of the firm.